Getting pricing right on platform marketplaces for services such as Uber, Fiverr, and Postmates is critical to successfully attracting buyers and sellers, and according to new research in MIT Sloan Management Review, platform operators aren’t always the right parties to make pricing decisions.
The researchers argue that a platform’s long-term sustainability requires balancing the marketplace’s health with the power dynamics among participants and often sharing pricing power with service providers and customers.
“Granting price-setting control is a major strategic decision that ultimately determines value creation and capture and establishes the power dynamics between the platforms themselves, service providers, and customers,” explains Jovana Karanovic, an assistant professor at the Rotterdam School of Management, Erasmus University, and co-author of “Who Should Price a Gig?”
“Creating a scenario where all three stakeholders find the pricing model sustainable and beneficial is the key challenge that platform leaders face. And the solution is usually a hybrid format where some decision and control rights are shared,” she says.
Karanovic and coauthors, Elizabeth J. Altman, an associate professor of management at the University of Massachusetts Lowell, and Carmelo Cennamo, a professor of strategy and entrepreneurship at Copenhagen Business School, conducted interviews with platform executives, evaluated pricing models of platform-based businesses in different regions, and analysed data from a service platform that had changed its model to allow providers to set prices.
Providing a framework for understanding key trade-offs of different platform price-setting approaches, “Who Should Price a Gig?” examines the benefits, risks, and hybrid solutions for all stakeholders.
“Platform leaders must realise that a platform is not a unilateral, hierarchically managed entity but rather a web of economic and social relationships. To manage it successfully and ensure satisfaction by all parties, they must share some aspects of control with other stakeholders, allow for compromise, and step in to support their workforce when needed,” said Altman. “When control is shared more equitably by all parties in the platform relationship, the platform model can cater more beneficially to all.”